How the Treasury will benefit from tax avoidance
The Treasury should not grieve too greatly at companies such as J Sainsbury (LON:SBRY) paying early bonuses to avoid the new top income tax rate. By paying during the 2009/10 tax-year the exchequer will receive 40 per cent tax now rather than 50 per cent later, and time can be more valuable than money.
For a chancellor preparing a budget aimed at winning a general election, a boost to tax receipts for the old year is better than a bigger boost in the future. Better figures now might allow the chancellor’s party to win: the alternative is for him to suffer the opprobrium of raising taxes only to see the Conservatives reap the rewards of receiving them.
J Sainsbury is bringing forward payment of bonuses for all its 120,000 staff. For the highest earners, that will mean payment before the 6 April start of the tax year when the top tax rate rises to 50 per cent for earnings exceeding £150,000 a year. It is nifty accounting, given that the supermarket’s financial year does not end until 20 March and it usually takes until mid-May to pay bonuses.
Other staff will receive early payments in April too and several other companies are also considering advancing payments to all staff.
If that means lower staff at some companies receiving two bonuses in one tax year – one after April 2009 and an early one before 6 April 2010 – that not only brings forward payments to the Treasury, it could push basic-rate taxpayers into the 40 per cent bracket so that the exchequer receives tax at a higher rate as well as an earlier date.
There is the inevitable suspicion that boards can suddenly change practice at short notice because it affects their own pay. Saving 10 per cent off the Sainsbury chief executive’s bonus - £2m in past years plus a million shares –concentrates the corporate mind.
But the early payment policy is now being extended not only to lower ranks but to shareholders too. A range of companies from Hays to Rio Tinto are paying their dividends in the last week of the old tax year to save their affluent private investors from the 50 per cent tax rate. Less affluent shareholders will still have to pay their old rates – but will have to pay the tax a year early. The Treasury wins either way.
